Key News

Asian equities were a sea of red as the headlines scream US China trade talks are faltering as President Trump says China needs to step up to get a deal done while the House passes the Hong Kong Human Rights and Democracy Act of 2019 by a nail biter of 417 yes to 1 no. President Trump is expected to sign it over the next few days as China accuses the US of meddling in its domestic affairs, which some worry will jeopardize trade talks. Markets are anticipating that Trump will sign it. Overnight, there were several positives as China has Vice Premier Liu He said at a Bloomberg event in Beijing that he was “cautiously optimistic” a deal will get done. There is talk that China has invited the US trade team to China in order to hammer out a phase one deal. Remember that Hong Kong is primarily owned by global and emerging market investors, which is why it continues to underperform dramatically. Mainland China held up quite well as investors there appear to be moving beyond the trade war though are waiting for a positive catalyst. Interesting to note chatter of increased infrastructure spending is leading to a pickup in industrial and material stocks in the Mainland.

China wants a trade deal as tariffs are raising unemployment in low end manufacturing. Why does the US want a trade deal? Strategist Larry McDonald noted that Econbrowser.com shows that Michigan, Pennsylvania and Wisconsin’s manufacturing employment has declined YTD. Swing states were a major reason for President Trump’s election. The US is not an economic island as the trade war has thrown sand in the gears of the global economy and particularly global manufacturing. A global car manufacturing slump hasn’t helped. The Financial Times had an interesting article saying that farmers support for Trump has fallen due to his reversal on supporting ethanol. The Trade War has impacted both of these key voting constituents in advance of next year’s election.

Who was that one vote against the Hong Kong bill? Kentucky Congressman Massie, who articulated why in a Fox News interview that is quite good. In it, he speaks to the recent extension of the Patriot Act that Congressional leaders have jammed through with little to no discussion nor debate. While he agrees with the Hong Kong bill he couldn’t vote it for it as it includes potential sanctions, the consequences of which he says are unknown. He also mentioned that the bill has little bite to it and is more of a symbolic gesture.

CNBC just reported that the Apple factory President Trump visited yesterday is actually not owned by Apple. This is a technicality as Apple outsources manufacturing, which helps keep its margins high.

Meituan Dianping (3690 HK) reported very strong Q3 results after the HK close this morning. The company grew both the topline and bottom as it swung to a profit from a year earlier.  The company exhibited fiscal discipline that should be congratulated.

• Revenue +44.1% to RMB 27.493B versus estimate 26.01B and Q3 2018’s 19.075B
• Gross margin 34.95 versus estimate 32.8%
• Total gross transaction volume +33.6% to RMB 194B
• Annual transacting users +14% to 435.8mm from 382.3mm  YoY
• Gross profit +109.8% to RMB 9.6B from 4.6B
• Selling and marketing expense as a percentage of revenue decreased to 20.4% from 24.2%
• Adjusted EBITDA and adjusted net profit RMB posted gains of RMB 2.285B and 1.942 from a loss of (1.171B) and (2.471B)

Baozun (BZUN US) reported Q3 earnings prior to the US open this morning that were alright other than they missed analysts’ high expectations. BZUN has been an investor favorite over the last several years as it helps western brands navigate China’s e-commerce landscape. I would expect the stock to give up some of those previous gains.

• Revenue +35.3% to $210mm (RMB 1.503B) versus estimate 1.52B
• Gross merchandise value +42.8% to RMB 9.081B
• Operating expenses increased to RMB 1.447B ($202mm) from 1.071B
• Net Income increased to RMB 38.968mm ($5.5mm) from 29.787mm
• Adjust EPS RMB 0.99 ($0.14) versus estimate 1.01 though up from YoY RMB 0.86
• Q4 revenue forecast RMB 2.7 to 2.75B versus estimate 2.81B

Online gaming company Netease (NTES US) reported after the US close yesterday. While earnings were positive, the lack of new hit games releases has some worried about future growth.

• Revenues +11.2% to $2.047B (RMB 14.635B) from RMB 10.348B
• Gross profit +8.9% to  $1.1B (RMB 7.870B) from RMB 7.224
• Gross margins 63.8% from 23.3%
• EPS RMB 98.66 ($13.80) from 12.43
• The company will payout larger normal dividend of $13.80

H-Share Update

Despite Hang Seng gapped down -1.12% at the open and hit an intra-day low of -2.17% but managed to crater only -1.57%/-422 index points to close at 26,466. The index actually closed off its early morning low of 26,328. I suppose that’s a positive. The index is sitting on support, which, if broken, could see it fall to the 25,500 level. Volume spiked +20% day over day though volumes were still off the 1-year average. To put things in perspective, today’s volume was less than half of the massive trading back in February. Breadth was awful with only 2 advancers and 48 decliners led lower by Tencent -1.85%/-47.4 index points, China Construction Bank -2.03%/-41.9 index points and AIA -1.41%/-36.9 index points. Food company Want Want China and diaper company Hengan International were the only stocks posting gains, +1.39%/+1.5 index points +0.39%/+0.43%. Apple supplier Sunny Optical was the day’s worst performer off -4.18%/-11 index points followed by real estate New World Development -4.08%/-7.8 index points with AAC Tech -3.85%/-4.2 index points and other real estate companies right behind it. The Hong Kong stocks within the MSCI China All Shares Index fell -1.56% as materials gained +0.08% while tech was blasted -2.34%, discretionary -2.21%, communication -1.7%, real estate -1.66%, financials -1.57%, utilities -1.56%, industrials -1.44%, healthcare -1.09%, energy -0.98% and staples -0.64%. Southbound Connect volumes were moderate with buyers out in force. The number of buy trades versus the number of sell trades was 2 to 1 buy while the dollar value of buys versus sells was also 2 to 1. Volume leaders CCB, Meituan, and ICBC all had very significant buying while Tencent was mixed.

A-Share Update

The Shanghai & Shenzhen were off -0.25% and -0.24%, respectively, though volumes slumped -15% day over day. Breadth was mixed with 1,635 advancers and 1,884 decliners as large caps declined slightly more than mid and small caps. The Mainland stocks within the MSCI China All Shares Index -0.18% as energy +0.83%, materials +0.42%, utilities +0.42%, industrials +0.28%, tech +0.23%. However, healthcare slumped -1.62%, discretionary -0.69%, financials -0.32%, staples -0.16% and communication -0.15%. Northbound Connect trading was moderate/light as, once again, Shenzhen Connect volume and buying outpaced Shanghai Connect. While Shanghai was ever so slightly skewed towards sell, Shenzhen stocks were bought. In total, foreign investors bought $89mm of mainland stocks today, bringing the weekly total to $681mm.

An Asian media source noted that Restaurant Brands International will open its first Popeyes in China early next year following the entrance of its Burger King and Tim Hortons brands.

Last Night’s Prices & Yields

Big bond rally continues

• CNY/USD 7.0282 versus 7.034 Yesterday; CNY dipped to 7.05 but roared back
• CNY/EUR 7.79 versus 7.79 Yesterday
• Yield on 1-Day Government Bond 1.73% versus 1.78% Yesterday
• Yield on 10-Year Government Bond 3.17% versus 3.17% Yesterday
• Yield on 10-Year China Development Bank Bond 3.55% versus 3.55% Yesterday
• Commodities were lower on the Shanghai & Dalian Exchanges with Dr. Copper -0.04%